New guidance on dividend and distributable profit payouts

27 April 2017

Following a number of high profile problems over dividend payments, Domino’s Pizza and Dunelm being high profile examples, the ICAEW and ICAS have published guidance on realised and distributable profits (Tech 02/17BL), covering treatment of dividends, which now takes into account the impact of FRS 102 accounting rules.

The new guidance seeks to explain how to identify, interpret and apply the principles for determining realised profits and losses for making distributions and dividend payments under the 2006 Companies Act.

Some of the changes made are:

The definition of a distribution, addressed by additional footnotes clarifying that the guidance reflects case law

The consequences of accounting for off-market intragroup loans in accordance with FRS 102, addressed by extensive redrafting but without changing the overall conclusions reached.

The consequences of the change in the law concerning distributable profits in relation to long-term insurance business made by The Companies Act 2006 (Distributions of Insurance Companies) Regulations 2016 (SI 2016/1194) which were made on 7 December 2016.

The institutes state that they are aware of the calls by some investors for greater transparency about dividend policy and capacity including distributable reserves. The FRC’s Financial Reporting Lab issued an updated report ‘Disclosure of dividends – policy and practice’ in December 2016 which gives guidance on how companies can make dividend disclosures more relevant for investors.

The effect of changes in accounting policy (resulting from the application of new or revised standards) may lead to changes in the timing and amount of revenue or costs recognised, and hence profit. This may result in reducing or even eliminating a company’s net realised profits.

That would not mean that a distribution already made out of realised profits is unlawful, provided the distribution was calculated by reference to ‘relevant accounts’ which had been prepared in accordance with generally accepted accounting principles. However, distributions that are made in the period in which a new or revised standard is to be adopted, this may not be the case, so take care!